So, what is the difference between an LLC and an escorp? So, in essence, both of them are an LLC on a state level. Um but the escorp is a tax election with the IRS to kind of treat you differently to help lower your taxes at the end of the year, and mostly regarding payroll, payroll taxes. So how a business owner is getting paid through the company. It's a, so the LLC is a legal entity. You can anyone can have the LLC. So it does help you with, um protecting your personal assets. Again, but I'm not a lawyer. Um, so I know a lot about the LLC and the escorp, but not not when maybe to, um go from a sole proprietor to an LLC. Anyways, it is a tax election with the IRS. And why would you do that?
So, in the taxes, the LLC basically all of the profits are taxed and are part of the self-employment taxes. So any profits that you get, the owners must pay self-employment tax. So if you're 100% owner, you would pay all of the self-employment taxes. If you were 50/50 and you split your profits that way with a different partner, then you would pay your portion of the self-employment tax and the others. It is a lot simpler as there's not as much paperwork and regulation to go through as the escorp and it does make a lot of sense when you're just kind of first starting and starting your business and you don't have that regularity of income that's coming in. In an escorp though, you are basically going to split your salary and distribution so this time When you're an escort, you won't have to be fully taxed all of the payroll taxes on your net income. You will be taxed on a portion. So, your payroll taxes and then any distributions, those are not or just profits, those are not subject to self-employment taxes. And this can help reduce taxes.
What am I actually saying? Let's actually go into some numbers and kind of show you what's happening. Okay, so for example, we have our sole prop or LLC and, so we have the LLC on one side and the escorp on the other. So both of them have a sales of 300,000 and then both of them have the expenses of 120. Now what's different in the escorp is that you are required to pay a reasonable wage to the owners for whatever your job is. So whatever is comparable to the market, the IRS doesn't give like very specifics but just think that if you were to replace yourself how much would you have to pay someone else to do your job? So we start with the 300 120. So we all have those expenses but the escorp has 72,000 in wages and then they also incorporate the payroll taxes. So payroll taxes as you know there is an employee side which the employee pays and the employer side which the business pays. Now, when you are an LLC, you're basically paying for both. And same with an escort, but it's just the way and where you deduct them is what is actually mattering. What is actually what actually matters.
Okay. So, our profit for the LLC is 180 and you can see that the escorp is already significantly down at 102492. And this only is sorry this is also only encompassing the IRS the federal, the federal taxes. It does not incorporate any additional if your state has other taxes involved with, with payroll and employees. Think of LNI or workers comp and self unemployment. So those types of things I am not accounting for those. But anyway, so you have your profit as 180 and 102. So now we're going to go down further. Okay. So now what we're looking at here is okay. Well, how much is our taxable income? So we do have to incorporate our wages as taxable income. So on the escorp side, you see 72,000 here. And your 102 from above that profit side is also part of your taxable income. So you have 72,000 and 102. So you have 174 around 500 for your escorp taxable income. Now for your LLC, what you have is you have 180 of that original net profit. Um, and then on the tax form, you are allowed to take half of the payroll taxes and deduct them as a business expense. This is a tax portion and not on your profit and loss. Half of the 180, so let me back up a little bit. So the 7.65% is the employer only portion of the taxes. So that's going to be the same thing here. The payroll tax of 13,000. So 7.65% of 180 is going to be that 13770. So on the LLC you have the taxable income of 166. So slightly less than the escorp, but already you can see that the payroll tax is higher on the LLC than we have already paid on the escort. The escorp we've only paid 5,500 for payroll taxes and on the LLC we have paid 13,000 on the payroll taxes.
Let's continue down. Okay. So then we incorporate all of the taxes. So let's a generalization is that you're going to hit about 24% of the federal taxes. So that amount is going to be Oh, you can see my mouse here. I'm utilizing my mouse. Anyway, so the federal tax rate is going to be on this taxable income. So as the LLC has a slightly lower tax taxable income, your same thing will happen on your federal side. So 166,000 you're taxed at 3989 8.95 and then on the escort it's a little bit higher at 48,000 or 41,878. And that's 24% of that 174. And then we still so when you are an LLC you must still pay self-employment tax. It's just done in your estimated taxes or at the end of the year. You are required to pay this. you cannot get out of that piece. You can deduct that 13,770 that we talked about just prior from your as a deduction to lower that taxable income, but you still have to pay 27,550 of payroll taxes to the IRS. When we look at the escorp though, if we encompass both the employee and the employer side of the taxes, this is significantly reduced to $11,16. So at the end of the day, you can see that the LLC they have paid a total of 67,435 where the escorp has only paid 52,894. So this is a reducing your taxes owed at the end of the year.
All right, bringing it all back. So we have a profit for the LLC of $180,000. The escorp has $102492. You have to incorporate your wages of 72,000. We have a total taxes of on the LLC 67,000. Um so 180 minus all of the taxes 67435 in your bank you potentially are getting 112565 at the end of the year. So that is cash in your bank that you took home. Potentially you may not have to taken all of the profits but just in general rule that's what we're looking at. When we look at the escort though, we're taking our profit plus our wages minus our 52894 for taxes in the bank. We actually have $121,058. So in all it is all a tax strategy and how to pay to legally pay less taxes. This is not tax evasion. This is a this is the rules that the IRS has set up that we can tax strategize to lower our tax bill. But when we are part of an escorp, it does require more regulation and and more cost. So your tax filing is going to be more potentially depending on your accountant. You will have to have a payroll service or someone that you have hired in order to run a regular normal payroll just like you would with any other employee. It is really important to do this as the IRS is looking and making sure that you aren't just taking, you know, $10,000 as your wages and the rest is distributions because they they still want their money. But you are allowed to kind of restructure things so that you are paying less money to the IRS. So it can be advantageous. Typically people switch from an LLC over to an escorp from around, you know, if you're doing a net income of around 60 or $70,000 regularly, you can start looking at switching over to that escorp. But you don't want to do it earlier than that because there's really with all of the compliance that is incorporated in having an escorp, it doesn't make a lot of sense to transition over from an LLC to an escort. And there's also not flippy floppy. So, you do want to choose that when you have that regular income coming in on a structured basis that you make that escorp election and continue on. Because then you'll just moving forward that will now be your tax structure.
I am winded. I hope you learned a lot of information though. That was it's going into that higher level understanding taxes. There is a lot involved with it. But we are always here to help guide you. Look at your numbers. See if we can help in any sort of way. If you're still just not understanding it, we can break down those specific things for your case. But thank you so much for joining today and I look forward to seeing you in the following week. I hope you have a great weekend.
